Preferential Income Tax Rate and Research and Development Investment: Evidence from Small and Medium-Sized Listed Firms in China

Abstract

This study investigates the impact of a preferential income tax rate on research and development investment for small and medium-sized Chinese listed firms from 2013 to 2017. The results reveal a significantly positive relation between the preferential income tax rate and research and development investment. Such a positive relation appears to be more significant for non-state-owned firms and for firms located in provinces with higher research and development intensity. The instrumental variable method, the two-stage Heckman method and propensity score matching are employed in this study to support the finding that the preferential income tax rate has a positive external impact on research and development investment. The empirical results are robust with respect to endogeneity.